What Asset Classes Should I Place in My Roth IRA?

Make stocks a part of your portfolio.

The Roth IRA represents an interestingly different approach to retirement. While most retirement plans, like the 401k and 403b plan, allow you to put aside pre-tax money and tax the funds on the back end, a Roth IRA is just the opposite. You invest in your Roth IRA with after-tax dollars, but when you retire you can take the money out and owe no federal income taxes. This tax-free treatment makes the Roth IRA particularly suited to a number of asset classes, including aggressive growth stock funds and individual stocks.

High Turnover Funds

When you invest personal money, you want to look for mutual funds with a low turnover percentage. Funds with a high turnover tend to generate a lot of capital gains, and that can really raise your tax bill. Since the money in the Roth IRA grows tax-free, that account is the perfect vehicle for those high turnover mutual funds. You can find information about the turnover ratio, and the performance, of the mutual fund by reading the prospectus you receive from the mutual fund company.

Individual Stocks

The tax-free status of the Roth IRA makes it the perfect choice for buying and selling individual stocks. You can sell stocks within your Roth IRA without having to worry about capital gains taxes. That means you can focus only on the actual growth of the stock and your profit when deciding when to buy and sell. If you open your Roth IRA with an online discount broker, you can buy and sell stocks for only a few dollars per trade, keeping your costs low while you build your portfolio.

Aggressive Stock Funds

While the tax-efficiency of index funds makes them a good choice for personal investing, you might want to be a little more aggressive with your Roth IRA money. Since the gains you make in your Roth IRA are not subject to tax, investing that money in aggressive growth mutual funds can be a smart move. Look for a fund that has had a consistent track record of beating the market in both good years and bad. If you choose a great fund that continues to perform well, you can beef up your retirement savings and enjoy a steady stream of tax-free income once you retire.

International Investments

If you lack an international element in your investment portfolio, your Roth IRA is the perfect place to invest outside the country. You can choose from a variety of international investments for your Roth IRA, from widely diversified funds that track the markets in Asia, Europe and around the world, to sector funds and single country markets designed to cash in on a particular part of the globe.

References

• Kiplinger Magazine: Why You Need a Roth
• CNN Ultimate Guide to Retirement: Roth IRA